The FOMC maintains its rates. One highlight is that certain mortgage backed securities held by Fed are maturing. Fed will use this money to buy Treasury Bonds. So, Fed balance sheet will not shrink. NY Fed has released the guidelines for this reallocation

Ajay Shah is back to his criticism of RBI. Well, it all sounded good before the crisis (not to this blog even then). Not now. The papers he points are just a one sided view. There are so many papers questioning the monetary policy framework. It requires something to make a statement like this after seeing and reading so much about issues with economics:

We continue to be in a situation where RBI’s thinking on monetary policy is quaint and out of touch with world class knowledge of economics.

I also found this new speech which is like a continuation of his previous speech that criticised economists big time. This is given at Central Bank of Barbados’ Research Review Seminar on July 26, 2010. Supposedly the research department at the bank is quite good.

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There are usually three ways to measure inflationary expectations in an economy:

Surveys

via Inflation protected securities

via some econometrics techniques (see this paper which measures India’s inflation expectations using this technique)

As third option can’t be updated every now and then, first two are preferred. In India, we do not have Inflation protected securities (though there are talks of issuing them), we are left with surveys.

Gulzar posts about storing solar power via molten salts. Earlier solar power plants remained idle after sunsets. Now because of innovations, a solar power plant can continue to produce energy 8 hrs after sunset. Though there are huge challenges to be overcome before it becomes commercial.

John Cassidy of New Yorker has written this must read article. It is actually a profile of Paul Volcker but has a very exciting discussion on political economy of financial regulation in US. It also explains how big this lobbying business is in US.

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Cowen points Christina Romer to step down from CEA and Peter Diamond not confirmed as Fed Governor. Also see this funny article on economic forecasting

Bush had passed certain tax cuts in his time. They are set to expire next year. There is a debate on whether they should continue. Krugman says let the tax cuts go and instead increase public spending. Unfortunately, that’s not going to happen. Given the political realities, he suggests go for a temporary extension of the lower-end cuts, and just letting the upper-end cuts expire.

Today a very crucial data is to e released – US unemployment rate for July 2010. Markets expect non farm payrolls to be at -ve 65,000 and unemp rate at 9.6% , higher than 9.5% in June. Anything higher or lower will lead to corresponding market movements. Economix points what to expect in the report

The “outcomes” section of the paper clearly shows that the central government has missed both the fiscal and revenue deficit targets by some margin. Its fiscal deficit for the terminal year, 2008/09, was 6 percent of GDP, excluding estimated off-budget expenditure (settled by IOUs or simply ignored) of about 2 percent of GDP. After 2004/05, not only has there been no fiscal correction once off-budget items are included, but indicators mostly deteriorated. Taking into account off-budget expenditure, it is amply clear that the FRBMA “transition” annual targets towards a 3 percent of GDP fiscal deficit and balance on the revenue account by 2008/09 were exceeded before the onset of the 2008 Great Recession. Moreover, the FRBMA’s clauses were insufficient to prevent the finance minister from excluding (unpaid) dues on account of subsidies in calculating the fiscal and revenue deficits; the provision for off-budget bonds was inadequate to cover the expenditure overrun (or deliberately shown to be low); for example, estimates by market analysts suggest that excess expenditure was about 1.9 percent of GDP in 2007/08.

The adverse evolution in the center’s fiscal balances was not on account of the operation of automatic stabilizers during a cyclical slowdown; on the contrary, the Indian government’s revenues have been buoyant. The gross tax-GDP ratio increased from 9.7 percent in 2004/05 to 12.6 percent in 2007/08 on the back of an almost 9 percent average annual real growth rate. The recent profligacy of the central government has its primary driver in populist spending policies by the ruling coalition leading up to national elections in May 2009. Three stimulus packages, including a reduction in indirect taxes, starting in late 2008 to counter global recessionary headwinds only helped matters along in the same direction. Much of the slippage on the expenditure side can be attributed to large and increasing energy, food and fertilizer subsidies; funding loss-making public sector units; expanding a rural income support scheme (started in 2005); increasing salaries and pensions of civil servants (implemented in 2008), and a huge agricultural loan waiver scheme announced in early 2008 but not budgeted for!

Then State governments finances have improved which has been usurped by Centre:

Fiscal consolidation by state governments (in aggregate) in recent years has been commendable. Between 2003/04 and 2007/08, their fiscal deficit declined markedly from 4.4 percent to 1.5 percent of GDP. The main explanation being that enhanced budget revenues were not offset by discretionary action on the expenditure side. During 2008/09, the fiscal performance deteriorated somewhat with the deficit at 2.6 percent of GDP, but still below the mandated 3 percent ceiling. This was due to the economic slowdown and the accompanying moderation in the pace of revenue growth. However, the revenue deficit in most states was within the target of zero balance in 2008/09. The management of states of their fiscal affairs over both a period of high growth and the subsequent slowdown exhibits successful conduct of “discretionary countercyclical” policy within the rules. Therefore, the recent deterioration in India’s national fiscal situation cannot be blamed on state governments. The evidence suggests that in recent years the fiscal space “vacated” by the states has been usurped by the central government. Nevertheless, caution is warranted: recent fiscal restraint by state governments does not necessarily imply continuation of rectitude in the future.

What are the options ahead?

Political opportunism (rational at the individual, partisan level) in India as elsewhere calls for the postponement of expenditure cuts or tax increases and the prompt spending of revenue windfalls. There is always the chance that the political cost of painful fiscal retrenchment will be borne by the opposition, when its turn in office comes around. The main difficulty thrown up by our analysis of outcomes under the FRBMA and other FRLs remains the design of a fiscal rule to incentivize the government not to give in to a procyclical bias, which behaviourally and in practice is especially pertinent for policy during upswings.

It is not surprising that given the fiscal situation in India, there has been a flurry of activity. Both the 13th Finance Commission’s report and the central government’s 2010/11 budget have laid out a road map to cut the fiscal deficit and public debt over the next five years. Drawing lessons from the central government’s conduct in recent years, the FC’s report has, to its credit, made constructive suggestions for changes in the areas of transparency, limited in-built flexibility, and enhancing the integrity of fiscal policy in the design of future legally-binding rules. Although the “golden rule”, a balanced revenue budget, has been maintained as an objective in the latest proposals, the important change in emphasis is the dominance of gross public debt-GDP ceilings over the next five years. It is noteworthy that the FC spurned the opportunity to demonstrate innovation in the urgent and difficult task of designing and implementing a time consistent fiscal rule for the sovereign (in a democracy which shows a sustained proclivity for running high fiscal deficits without public opprobrium). In this context, we draw the paper to a close by outlining a basic incentive compatible framework for state and central governments to hold each other accountable over agreed pre-determined targets.

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CBO isn’t just about preparing budget reports/outlooks of US government. It comes up with some exciting reports once a while on varied topics. It recently released this super report on immigrants in US labor market.

People born in other countries represent a substantial and growing segment of the U.S. labor force—that is, people with a job or looking for one. In 2009, 24 million members of the labor force—more than one in seven—were foreign born, up from 21 million in 2004. However, the growth of the foreign-born labor force was much slower between 2004 and 2009 than between 1994 and 2004. In that earlier period, the size of the foreign-born labor force grew at an average annual rate of more than 5 percent, whereas from 2004 to 2009, the rate was about 2 percent. As a share of the total, the foreign-born labor force grew from 10.0 percent in 1994 to 14.5 percent in 2004 and to 15.5 percent in 2009.